Ko Yo Chemical (Group) (HKG:827) Shareholders Will Want The ROCE Trajectory To Continue

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Ko Yo Chemical (Group) (HKG:827) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Ko Yo Chemical (Group):

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.059 = CN¥106m ÷ (CN¥6.0b - CN¥4.2b) (Based on the trailing twelve months to June 2024).

Thus, Ko Yo Chemical (Group) has an ROCE of 5.9%. Even though it's in line with the industry average of 6.0%, it's still a low return by itself.

See our latest analysis for Ko Yo Chemical (Group)

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Ko Yo Chemical (Group) has performed in the past in other metrics, you can view this free graph of Ko Yo Chemical (Group)'s past earnings, revenue and cash flow.

What Can We Tell From Ko Yo Chemical (Group)'s ROCE Trend?

We're delighted to see that Ko Yo Chemical (Group) is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 5.9% on its capital. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 70% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Bottom Line On Ko Yo Chemical (Group)'s ROCE

To bring it all together, Ko Yo Chemical (Group) has done well to increase the returns it's generating from its capital employed. And since the stock has dived 76% over the last five years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.

On a separate note, we've found 1 warning sign for Ko Yo Chemical (Group) you'll probably want to know about.

While Ko Yo Chemical (Group) may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.